Abstract
In this paper, we investigate how firm–bank relationships affect corporate cash-holding behavior. Using bank loan and financial statement data from emerging firms in Japan, we find that firms with concentrated bank relationships hold lower levels of cash. Additionally, firms with such bank relationships have less propensity to save cash from their cash flows, but we do not observe an effect of bank relationships on cash holdings among firms with access to bond markets. Smaller firms with concentrated bank loan structures hold higher levels of cash. Our results are robust as far as the endogeneity bias and managerial agency problems are concerned. These findings suggest that concentrated bank relationships affect firms' cash holdings, driven by precautionary motives, but such relationships lead to hold-up problems among smaller firms without alternative sources of liquidity. We also find that the negative effect of concentrated bank relationships is weakened after financial crisis periods.
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